Standing Committee A

Thursday 24 January 2002

(Afternoon)

[Mr. Nigel Beard in the Chair]

Clause 33

Offence of fraud

'(3) The Secretary of State shall within one year of this section coming into effect and every year thereafter make a report to Parliament on—

(a) the extent of fraud in claims for tax credits, and

(b) the measures he has taken to deal with fraudulent claims for tax credits.'.—[Mr. Clappison.]

2 pm

The Chairman: I remind the Committee that with this we are debating clause 33 stand part.

Mr. James Clappison (Hertsmere): I welcome the Paymaster General to our deliberations on this important clause. The Financial Secretary was present for the debate this morning, but we entirely understand that he cannot be in two places at the same time and he has to be in the Chamber to reply to the debate on the Public Accounts Committee. He is not with us, but the Paymaster General is with us instead and they will have liaised on the points that were made this morning. I raised some detailed points to which I did not necessarily expect the Financial Secretary to have answers to at his fingertips and I said that it would be satisfactory if he wrote to me in good time.

However, some general points remain on which I seek an answer from the Paymaster General. It is apt that she is here for this debate, because she and I have debated the incidence of fraud in the working families tax credit and have corresponded about it in the past. The debate gives me another opportunity to ask her again—I put the same question to the Financial Secretary this morning—how much fraud there is in the tax credit system.

That question will not come as a surprise to the Paymaster General, as we have debated the issue in the past. On 11 April 2001 she was good enough to write to me following the debate on the uprating order. I am sure that her memory will not need jogging, but she will remember that last year there was a special uprating order for the working families tax credit because, in addition to the inflation-linked increase in April last year—I was about to say ''miraculously''—somehow the Government also decided to increase the working families tax credit by an additional £5 above inflation in June last year. The Paymaster General will remember speculating about the timing of that increase and how it came about. She will also remember the letter that she wrote to me on 11 April 2001 in which she said:

''The Inland Revenue are carrying out a benchmarking exercise to establish the level of fraud in tax credit claims. This began in September 2000 and will run for twelve months. The results will be

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used to ensure tax credits compliance work is carried out in the most effective way.''

The period of 12 months ended in September last year, so we should like to know from the Paymaster General whether, as is presumably the case, that benchmarking exercise has been completed, whether Ministers know the results and whether they plan to put the results in the public domain, so that we all know the extent of fraud in the working families tax credit system according to the Inland Revenue.

We also want to know generally what the Government's plans are for tackling fraud, a general point that we raised this morning. We want to know what their plans are for Departments to work together, given that responsibility for these areas has now been fragmented between the Department for Work and Pensions and the Inland Revenue, and also what plans the Government have to work with local government and the private sector in tackling fraud.

I also want to ask the Paymaster General a question that was not raised this morning, which I had planned to ask if there had been enough time. Is it planned that the Inland Revenue should participate in the credit industry fraud avoidance system? She may be able to write to me on that rather than answer the question now, but we should like an answer at some stage.

We also want to know whether the Government have plans to widen the scope of inquiries into tax credits, something that comes under the Paymaster General's ambit. We understand that the Inland Revenue opened inquiries into 1.5 per cent. of tax credits. How was that figure arrived at as the proportion of tax claims to be investigated? We understand from the Inland Revenue's annual report that 28 per cent. of those inquiries found instances of non-compliance. It would be interesting for the purposes of the debate if the Paymaster General could tell us how many of those cases involved fraud. As we said this morning, we believe that there are too few prosecutions for tax credit fraud. I shall not go over those points again. I am sure that the Paymaster General will be familiar with them anyway, because she has divulged the information to me in written answers.

We also want more information about the use of the civil penalty in cases of fraud. In the first two years of working families tax credit 478 penalties were imposed in respect of claims—about 240 each year. Given that penalties can be imposed for negligence as well as fraud, how many were imposed for fraud? We can reasonably expect the Government to have a record of that, and again it would be interesting to have an answer.

We seek answers to all those questions because we believe that fraud is an important subject. We do not seek to draw a connection between fraud and anything else. We believe that fraud in itself is bad and we believe that that view is shared by the majority of the public, both taxpayers and recipients of tax credit. We believe that it is in the interests of all of us to take a vigorous approach to tackling fraud. Certainly Opposition Members seek such an approach. We

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intend to hold the Government to account for what they are doing.

Mr. Steve Webb (Northavon): I have some sympathy with the amendment. I believe that we all agree on the importance of tackling fraud, but in some senses working families tax credit fraud has probably not been approached with the vigour that the Department for Work and Pensions would have us believe it accords to benefit fraud. I would not dream of suggesting that the Treasury is less vigorous in these matters than the DWP, but the DWP issues press releases on this subject roughly weekly, so it must be active. I hope that the Treasury is as well.

The amendment would require a report in about a year's time on what the Government have been doing on tax credit fraud, which would be welcome. To be fair, the Government have taken one important step on fraud, which is to make an attempt to produce a baseline figure. As the hon. Member for Hertsmere (Mr. Clappison) suggested, that process is proceeding rather slowly; we do not seem to have got there yet. However, given the many decades in which levels of fraud were not even measured accurately, so that we could tell whether we were making progress, at least we seem to be making some headway.

The hon. Gentleman mentioned an aspect of tax credit fraud which, as he rightly said, I had raised in a written question to the Paymaster General. At that stage she could not give me an assessment of child care tax credit fraud, but is she aware of the relatively recent reports that suggest that child care providers are getting fed up? The scam appears to be that parents who know how to work the system book a child care place for six months or a year, get the provider's signature on the tax credit form, send the form in, get the child care tax credit for a six-month fixed period under the present regime and then do not turn up. The providers are being messed around quite badly and are feeling aggrieved. I suspect that if they had been aware of the child care tax credit fraud hotline, to which our attention was drawn this morning, they might have rung it, but I also suspect that many of them are not aware of it or simply do not bother. Clearly that is both fraudulent as regards the public purse and disruptive for child care providers. What spot checks are undertaken by the Treasury once an award has been made and will they be any more vigorous under the new regime of working tax credits and child care tax credits.

I give the Government some credit for trying to assess the extent of fraud in various parts of the system, although they have not quite got there in relation to tax credits. An annual report of the sort envisaged in the amendment would be a useful prompt and would apply a little more pressure. That would be welcome.

Mr. Howard Flight (Arundel and South Downs): As we are also debating clause 33 stand part, I want to raise the wider point of concern that the Bill will lead to a great deal more fraud and questionable behaviour. I do not intend to repeat the formidable arguments advanced by the right hon. Member for

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Birkenhead (Mr. Field) on Second Reading, which I am sure that he will repeat on Report and Third Reading. I hope that there will be more opportunity to comment on the subject in relation to new clause 13.

We have learned and understood that in the interests of continuity several requirements in the administration of tax credits will be relatively fuzzy. The Financial Secretary told us that he sees the complexities as being analogous to those of a television, in that people will be able to switch on their entitlements without understanding how the system works. However, it has been a sound tradition of Anglo-Saxon law to try to achieve maximum legal clarity so that people know whether they are on the right or the wrong side of the law. As the Paymaster General will know, I have on many occasions argued against the dangers of bracketing or muddling together tax evasion and tax avoidance. Where that has happened in continental Europe, notably in Germany, it has led to widespread social condoning of tax evasion. That is why the Germans wanted the withholding tax.

There are grey areas in the Bill. For example, it is not clear whether overpayments will be refunded or to what extent the Inland Revenue will be able to be more rule-driven about people's entitlements, and people will not be required to undertake formal reporting of their circumstances. I fear that that will lead to the kind of fuzziness that leads people to condone actions that are not wanton fraud but are slightly over the line. That is apart from the possibilities for fraudulent collusion between employers and employees that worry the right hon. Member for Birkenhead. We risk encouraging such behaviour if we try to make arrangements that are not too onerous for claimants who may not want to—or even be able to—deal with a more demanding regime.

That brings me back to negligence and fraud. For the reasons that were given, I agree that it is wrong to bracket the two. Apart from the danger that claimants will not really know what they are entitled to, as people learn the ropes they will develop bad habits. They will find out what the Revenue does not check or investigate and develop wheezes such as the child care providers wheeze described by the hon. Member for Northavon. The machinery needs to be much tighter. Perhaps this is only a framework Bill providing for various regulations that will ultimately achieve that. However, the explanations of the Government's intentions that we have heard so far have led me to catch a nasty case of unease from my hon. Friend the Member for Hertsmere.

The practices that may develop are not of a wickedly fraudulent nature or liable to send their perpetrators to prison, but wheezes that are wrong in themselves, cost the taxpayer a lot of money and lead to further clouding of the sound Anglo-Saxon approach of precision regarding what is within or not within the law.